Observations by an academic researcher on the use of “open”-ness as a competitive strategy, with a particular interest in coping with the commoditization of information goods and technologies in an Internet-enabled world.

Saturday, May 4, 2013

In running the @KeckGrad business plan competition this week, I was struck by how different our students’ life science startups were from the retail or IT startups that are common at other colleges. In most cases, our students needed $5 to $50 million in outside funding to jump through regulatory hoops and generate initial revenues.

It seems like this also reflects a fundamental difference in IP strategy — how a successful startup discourages entry or imitation, and how that ties back both to their funding needs and their IP strategies.

The retail startups have a brand, and locations, and perhaps a little bit of internal process trade secrets. Seed funding is available, but (shy of an IPO or acquisition) any subsequent growth tends to be organic and self-funded. Whether restaurants or clothing, these sorts of startups take years to build up, and the margins are generally thin.

The IT companies rely on copyright and trade secrets to protect their implementations, and hope to build network effects or switching costs to discourage entry. A hot property attracts plenty of money, because the scale is small and (if successful) the TTM and thus the payback time is quick. Still, a well-funded, well-run competitor could catch them. Many startups hope that the differentiator is the vision and positioning: for example, MySpace had years to respond to Facebook, but somehow never did.

Then there’s the life science companies: they need spend (and thus raise) huge amounts before ether generate revenues and — given mandatory regulatory disclosures — give rivals plenty of time to see what they are doing. The only way this works is if you have a patent, that gives investors an ironclad assurance of exclusivity for some period of time.

I'm not exactly sure what the model is for cleantech — but maybe there isn’t one. Certainly renewable energy — such as solar or biofuels — the hope is to leverage economies of scale to attain cost advantages in producing commodity energy. Given the hope of scale as a BTE (or BTI), many companies bulked up quickly, leaving a lot of dead companies strewn along the way. China’s Suntech was once world’s largest solar company — the first to sell 2 gigawatts of solar panels in one year — but is now shrinking and bankrupt.

If we look at older, mature industries, scale is never enough. Scale has reduced (but not eliminated) competition in electronics, steel and autos, but has done nothing to provide barriers to imitation to protect HP, US Steel or GM from subsequent entrants. If anything, the race for scale has led to overcapacity and thus price wars — in steel, DRAM, LCD panels, solar panels.